Turning point: Notice 44

Last year, China initiated a new piece of legislation, Notice 44, which introduced a new catalogue of restricted commodities and simultaneously encouraged manufacturers to set up factories in underdeveloped regions. Having gained approval from the State Council, the Ministry of Commerce and the General Administration of Customs jointly issued Notice 44 with effect from 23 August 2007. The group most affected by the notice has been manufacturers in Guangdong province.

So why are manufacturers moving west? This can be examined from a historical perspective. In the late 1970s, China implemented sweeping economic reforms. One of the first moves was to create new Special Economic Zones ("SEZs"), of which Shenzhen was the first. From 1984 onwards, economic development in Shenzhen was rapid, and so a new SEZ was established in Fuzhou. Later, Shanghai's Pudong district became a focus for development. Entering the 21st century, the authorities decided to implement a 'Moving Inland' policy, promoting development in Central and Western China and encouraging manufacturers to move there.

Soft and strong measures

The new policy punishes high-polluting and labour-intensive industries. The new list of restricted items in the processing trade adds 1,853 products, like plastics, textiles, clothing, furniture and other labour intensive items.

Simon S.K. Hung says that Hong Kong manufacturers should deal with difficulties positively.

The authorities have stipulated that processing trade manufacturers in Eastern China should have guarantee deposits in banks while registering their processing trade contracts. Enterprises should pay deposits according to their customs categories under the customs supervision system. Category A and B enterprises have to pay a deposit equivalent to 50% of their import tariff while Category C enterprises are required to pay a deposit equivalent to 100% of the taxes payable. Under the new policy, the regions affected include Shanghai, Jiangsu, Zhejiang, Beijing, Tianjin, Liaoning, Hebei, Shandong, and Fujian amongst others. Enterprises in these places are not allowed to engage in the trade of restricted items and do not have export rights.

On the other hand, processing trade manufacturers have the option to move to the West from the Eastern coast so as to avoid export restrictions. Simon S.K. Hung, who is the Managing Director of China Customs Consulting Limited and has served as Chinese Business Consultant for the Hong Kong Trade Development Council ("HKTDC") from 2000, explains, "In order to develop the Western regions, the Central Chinese authority has implemented both soft and strong measures. Notice 44 stipulates that foreign-owned enterprises should be transformed to local enterprises. The authorities intend for high polluting and low-capacity factories in Eastern China to be moved to Western regions. This will free up land for other uses. In contrast, as a member of the ASEAN group, China has reached an agreement with the South East Asian countries that states that imports and exports can have zero or low tariffs. Under this policy, manufacturers can export their goods through South East Asian countries in order to have zero tariffs. Besides, the authorities carried out significant tax reforms last year to integrate the two previous tax rate systems. Foreign-owned and local enterprises are now liable to the same rate of tax. The profit tax rate has been decreased from 33% to 25% in order to attract foreign enterprises to invest in mainland China."

Multi-layered difficulties

Nevertheless, it is extremely hard to set up factories in China's Western regions. Transport networks in these areas are not so developed, which has a negative impact on logistics. Manufacturers in Western regions can ship their goods by road, rail, or on inland waterway networks. Indeed, in recent years, the nationwide transportation infrastructure has improved continuously, but on the whole it is still less developed than those of industrialised regions. Restrictions still exist and the transportation infrastructure cannot meet logistics needs.

Simon says, "This affects goods shipment adversely as it involves 2,000 or 3,000-mile inland transportation. As the transportation networks in Sichuan, Chengdu, Chongqing and so on are not so well developed, shipment problems cannot be solved through road networks. Cargo is also shipped via inland waterway networks to Shanghai, Ningbo and other places."

According to one study, cost for shipments via road networks in the West could be more significant because long distance transportation costs are higher than those of rail and water transportation. Therefore, building factories in Western regions could adversely influence the entire logistics industry. Logistics enterprises and other suppliers would also have to move to Western areas.

In fact, efforts to develop the Central and Western regions of China have underway for 8 years, laying the groundwork for success. However, there is still a noticeable gap between East and West in China. Until now, supportive measures in the West have been insufficient. Compared to Eastern areas like Dongguan, there are less supportive measures and production moulding techniques, meaning that the level of support has a long way to go to match the East. Simon says that under these circumstances, setting up in the West does not lead to significant savings. He says, "Although land is cheaper, electricity, water bills, road transportation and labour costs are almost the same."

The main cause for such a huge gap is the fact that the West remains more 'closed' to the outside world. Huang Xiaoxiang, Vice Governor of Sichuan Province, suggests that related departments can assist Western regions to establish international trade and economic platforms for improving transportation infrastructure, developing two-way traffic and building a bridge between Europe and Asia. This would result in the Western regions opening up to outside trade.

Huang proposes that the government should change the way it allocates funds; lower the threshold of investing in financial markets in the West; implement a policy to control how funds are used; and stimulate capital inflows, in order to accelerate Western development while controlling any risks. Xu Shoucheng, Governor of Gansu Province, also asserts that guidance in various aspects should be given for development in the West and studies should be carried out so as to introduce some supportive measures.

Shift to service industry in the east

In contrast, under the new policy, it seems that there is little room for the development of the manufacturing industry in the East. Hong Kong SMEs who have plants in Southern China face increasing pressures. Since new labour contract law was passed at the beginning of the year, production costs for labour-intensive factories have soared. Some manufacturers have considered reducing or withdrawing their investments. According to one survey, almost 20% of manufacturers based in Southern China have plans to close their factories and move to other places. Moreover, around 30 enterprises are in negotiations with developers to sell their properties, in order to raise funds to set up elsewhere.

So, what is the future for these manufacturers? At present, the East remains the most developed area in the country. The service industry, comprising of IT consultation services, corporate services, and computer application and financial services, has grown rapidly in recent years. Therefore, this is the region responsible for the bulk of China's service industry. Undergoing a transformation to a postindustrial economy, Guangdong is promoting these non-polluting service industries.

Simon emphasizes that in their response to this difficult situation, Hong Kong manufacturers should consider the nature of their industry, and adapt in order to explore more room for development, and to turn crisis to opportunity. He says, "Indeed, Hong Kong manufactures should not be disappointed and miserable; there are ways to deal with these problems and arrive at positive outcomes, as crises bring opportunities."